3-D Matrix / 7777 COVERAGE INITIATED ON: LAST UPDATE:

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1 COVERAGE INITIATED ON: Shared Research Inc. has produced this report by request from the company discussed in the report. The aim is to provide an owner s manual to investors. We at Shared Research Inc. make every effort to provide an accurate, objective, and neutral analysis. In order to highlight any biases, we clearly attribute our data and findings. We will always present opinions from company management as such. Our views are ours where stated. We do not try to convince or influence, only inform. We appreciate your suggestions and feedback. Write to us at sr_inquiries@sharedresearch.jp or find us on Bloomberg. Research Report by Shared Research Inc.

2 INDEX How to read a Shared Research report: This report begins with the trends and outlook section, which discusses the company s most recent earnings. First-time readers should start at the business section later in the report. Executive summary Key financial data Recent updates Highlights Trends and outlook Quarterly trends and results Full-year company forecasts Medium-term outlook Business Business description Main business segments Main development pipeline Main business partners R&D System Group companies Business model Strengths and weaknesses Market and value chain Historical financial statements Income statement Balance sheet Statement of cash flows Other information History News and topics Major shareholders Dividends and shareholder benefits Top management Employees Glossary Company profile /82

3 Executive summary Summary 3-D Matrix is a medical technology company that develops, manufacturers, and markets a self-assembling peptide technology originally created at the Massachusetts Institute of Technology (MIT). Self-assembling peptides are composed of three types of amino acids, and upon coming into contact with neutral ph environments, the peptide molecules self-assemble to create a gel formed of nanofibers. These peptides are also unique in that they do not include organic compounds, yielding advantages in safety and homogeneity. Utilizing these properties, 3DM is working to commercialize products in various fields, such as surgery, regenerative medicine, and DDS. The medical products in development by the company are categorized as medical devices rather than pharmaceuticals. Consequently, the duration from application to approval is shorter and costs are lower compared to drug development. The company s key pipelines are absorbable topical hemostatic agent (TDM-621), mucous membrane protuberance agent (TDM-641), alveolar bone reconstruction agent (TDM-711), and wound healing agent (TDM-511). Among these, Shared Research believes absorbable topical hemostatic agent (TDM-621), which is applied through a syringe to bleeding areas caused by surgery, is of particular importance. Upon coming into contact with bodily fluids such as blood, TDM-621 self-assembles to create a gel formed of nanofibers to stop bleeding. According to the company, its advantages versus current blood coagulants include low infection risk, no requirement for informed consent, and a superior field of view. In January 2014, 3DM received approval to use the CE marking for TDM-621 in Europe. As a result, in the regions of Europe, Asia, Oceania, and Latin America, where products with the CE marking may be sold and submitted for regulatory approval without the need for clinical trials, the company plans to expand sales through sales agents and partnerships. According to the company, the market for blood coagulants is USD3.0bn globally. 3DM is aiming for a market share of between 30% and 50% in each region by leveraging the advantages of TDM-621 to promote replacement from current methods. Trends and outlook In FY04/17, 3DM reported operating revenue of JPY616mn (+334.2% YoY), an operating loss of JPY1.2bn (operating loss of JPY1.8bn in FY04/16), a recurring loss of JPY1.3bn (recurring loss of JPY1.9bn in FY04/16), and a net loss of JPY1.4bn (net loss of JPY2.5bn in FY04/16). For FY04/18, the company is projecting operating revenue of JPY304mn-JPY2.4bn (-50.6% to % YoY), an operating loss of JPY1.7bn to profit of JPY630mn (versus loss of JPY1.2bn in FY04/17), a recurring loss of JPY1.7bn to profit of JPY630mn (versus loss of JPY1.3bn in FY04/17), and a net loss of JPY1.7bn to profit of JPY620mn (versus net loss of JPY1.4bn in FY04/17). (See Trends and outlook.) 3DM s medium-term management plan for the period through FY04/20 targets operating revenue of JPY5.3bn-JPY8.0bn, operating profit of JPY2.0bn-JPY5.1bn, recurring profit of JPY2.0bn-JPY5.1bn, and net income of JPY2.0bn-JPY4.8bn. As factors expected to increase revenues and profits, the company cites product sales primarily of absorbable topical hemostatic agent TDM-621 via agents in Europe and through partnerships in Asia, Oceania, and Latin America, alongside one-time contract payments from sales of an anti-adhesion agent in Europe, and one-time contract payments from surgical partnerships in Japan. Strengths and weaknesses Shared Research believes that the three strengths of 3DM are its promise of the core self-assembling peptide technology, differentiated business model and large potential market. Its three weaknesses include its commercial success being dependent on outside partners, dependence on third party core patents with relatively short lives, and potential human resources bottlenecks. (See Strengths, weaknesses for details.) 03/82

4 Key financial data Income statement FY04/10 FY04/11 FY04/12 FY04/13 FY04/14 FY04/15 FY04/16 FY04/17 FY04/18 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Cons. Cons. Est. Operating revenue , ~2,354 YoY % 599.5% -97.1% 234.7% -6.9% 42.2% 334.2%-50.6%~282.3% Operating expenses ,031 1,626 2,003 1,963 1,856 YoY % 17.5% 36.9% 57.6% 23.2% -2.0% -5.4% Operating profit ,518-1,903-1,821-1,240-1,675~630 YoY OPM % Recurring profit ,524-1,795-1,936-1,270-1,675~630 YoY RPM % Net income ,525-1,995-2,459-1,393-1,700~620 YoY Net margin % Per share data (JPY; adjusted for stock splits) Shares issued ('000, year end) 13,568 15,168 18,355 18,936 19,876 21,438 21,522 21,615 EPS ~28.77 EPS (fully diluted) Dividend per share Book value per share Balance sheet (JPYmn) Cash and cash equivalents ,758 2,033 2,641 5,137 3,512 1,748 Total current assets ,501 2,484 3,593 6,204 4,422 3,388 Tangible fixed assets Investment and other assets Intangible fixed assets Total assets 1,198 1,199 3,055 3,020 4,121 6,809 4,460 3,424 Accounts payable Short-term debt Total current liabilities Long-term debt Total fixed liabilities Total liabilities Net assets 1,167 1,150 2,888 2,066 3,133 6,382 3,936 2,607 Total interest-bearing debt Cash flow statement (JPYmn) Cash flows from operating activities ,680-1,905-1,464-1,887 Cash flows from investing activities Cash flows from financing activities , ,360 4, Financial ratios ROA (RP-based) -6.2% -42.5% 14.6% -32.2% -42.7% -32.8% -34.4% -32.2% ROE -6.6% -46.3% 15.4% -39.9% -61.8% -53.7% -61.8% -47.2% Equity ratio 97.4% 95.0% 93.9% 67.3% 70.5% 88.7% 81.1% 66.8% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. 04/82

5 Recent updates Highlights On August 10, 2017, Shared Research updated the report following interviews with 3-D Matrix Ltd. (3DM). On August 8, 2017, the company announced that it began clinical trials of hemostatic agent (TDM-621) in Japan. The company announced that it enrolled the first patient at the domestic clinical trial facilities for hemostatic agent (TDM-621), which utilizes self-assembling peptide technology, and began clinical trials. The company has been progressing with procedures to begin clinical trials, and submitted a plan to launch a clinical study of TDM-621as a medical device on April 11, 2017 to the Pharmaceuticals and Medical Devices Agency (PMDA). It began clinical trials to compare the efficacy of TDM-621 with existing hemostasis methods in the area of gastrointestinal endoscopy. The company plans to continue trials in several clinical trial facilities in Japan and finish the clinical trial in roughly a year. After the trials, it plans on submitting an application to the PMDA to manufacture and sell this product. It has signed a domestic exclusive sales license agreement with Fuso Pharmaceutical Industries Ltd. for hemostatic agent (TDM-621). After obtaining regulatory approval, it plans to manufacture and sell the product. On July 10, 2017, the company announced that one of its collaborative projects had been selected for the Japan Agency for Medical Research and Development s (AMED) Project of Translational and Clinical Research Core Centers grant program. The grant program is part of the Advanced Research and Development Programs for Medical Innovation based at Hokkaido University funded by AMED, an Independent Administrative Agency. The project selected for the program is a collaboration between 3DM and Professor Hidetoshi Tahara (research representative), Graduate School of Biomedical & Health Sciences, School of Dentistry, Hiroshima University (the two member organizations are 3DM and Hiroshima University). The purpose of the project is to develop an innovative anti-tumor nucleic acid medicine that acts on cancer stem cells and cancer cells resistant to treatment with anticancer drugs. Tahara s team at Hiroshima University will study and develop a novel nucleic acid medicine with micro-rna it has specified to treat malignant pleural mesothelioma, a cancer that appears on the surface of the pleura, which covers the lungs. Mesothelioma is a cancer that appears on the surface of the pleura, which is often caused by asbestos. Given that it has a latent period of many years, the number of newly diagnosed patients is projected to increase by 2 3x to peak in A new drug is sought for the condition, which is currently treated by surgery and anticancer drugs, because many patients relapse after surgery and over 90% die within five years of diagnosis. The micro-rna effective in treating malignant pleural mesothelioma has been found to act against cancer stem cells and cancer cells resistant to drugs, which is believed to be the key factor that makes the difference between relapse and cure. The nucleic acid medicine being developed by the team combines the micro-rna with a surfactant peptide developed by 3DM. The team hopes that it will become a groundbreaking drug that completely cures malignant pleural mesothelioma. The Hiroshima University team selected the surfactant peptide developed by 3DM (which has already been applied in clinical settings) as the drug delivery system (DDS) that will deliver micro-rna to cancer cells. The company commented that it will supply the peptide and perform preclinical trials of candidate nucleic acid medicines over the three years of the AMED program as a research collaboration partner. 05/82

6 The company and Hiroshima University are currently preparing a joint patent application. 3DM expects to reach an agreement with the university to commercialize the product after the AMED program is completed. The company will progress R&D associated with the project to discover new applications for the peptide and commercialize new products. The AMED grant will have minimal impact on 3DM s earnings, because the recipient is Hiroshima University, the organization that the research representative belongs to. On June 29, 2017, the company announced that, jointly with the National Cancer Center in Japan, it had received a domestic patent for the application of a new nucleic acid medicine (microrna inhibitor) to treat osteosarcoma. The patent for the application of a new nucleic acid medicine technology (microrna inhibitor) in the treatment of osteosarcoma, which the company applied for jointly with the National Cancer Center in Japan has been approved domestically. Invention title: MicroRNA-Based Methods and Assays for Osteosarcoma Japanese patent No.: Patent holders: National Cancer Center, 3-D Matrix Ltd. Patent overview The patent is for the new nucleic acid medicine that treats osteosarcoma by inhibiting microrna (a kind of nucleic acid that exist in the body), as well as the application of microrna to monitor the condition of osteosarcoma. Among the various kinds of microrna in the human and animal bodies, the National Cancer Center identified that mir-133a is associated with cancer stem cells (CSCs) that are related to the occurrence and malignancy of osteosarcoma and other sarcomas. The finding is expected to help researchers monitor the condition of osteosarcoma by measuring expression levels of mir-133a in the body and develop treatments to suppress osteosarcoma CSCs and other sarcomas by administering nucleic acid medicines (RNA, DNA, antisense, and others) that inhibit the functions of mir-133a. Osteosarcoma Osteosarcoma is a type of malignant tumor that occurs in bones and surrounding tissues, where abnormal growths are found within the bone. It is common for the disease to occur among patients in their teens. Treatments for osteosarcoma generally involve surgical resection and chemotherapy, but metastasis to the lungs is frequently observed and prognosis tends to be poor. Treatment of osteosarcoma using microrna Treatments using microrna and other nucleic acids have benefits as they act specifically on the functions of the target genes and are chemically synthesizable. Researchers around the world have been advancing their development targeting application as a new cancer treatment with few side effects. There has not been any remarkable progress in the treatment of osteosarcoma in the last 20 years. The nucleic acid medicine under the new patent may have the ability to regulate CSCs and is expected to become a new treatment that improves the prognosis of patients. Outlook Patent for the application of mir-133a in the treatment of osteosarcoma has already been approved in the US (USP ) in The company plans to use the patent to continue R&D globally and develop effective drugs for tumor and cancer treatment, and by doing so, maximize its enterprise value. On June 14, 2017, the company announced Full-Year earnings results for FY04/17; see the results section for details. The company also released its medium-term plan on the same day. For corporate releases and developments more than three months old, please refer to the News and topics section. 06/82

7 Trends and outlook Quarterly trends and results Cumulative (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 % of FY FY Est. Operating revenue % 605 YoY % -82.7% -40.1% -4.6% 334.2% 326.6% R&D expenses YoY 18.1% -19.1% -19.8% -19.0% -27.8% -37.1% -37.3% -29.0% SG&A expenses , ,285 YoY 19.0% 8.2% -2.3% -0.3% -20.9% -14.1% 1.2% 8.8% Operating profit ,369-1, ,203-1, ,185 YoY OPM Recurring profit ,404-1, ,189-1, ,209 YoY RPM Net income ,925-2, ,263-1, ,297 YoY Net margin Quarterly (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Operating revenue YoY % 293.3% 88.6% 691.6% R&D expenses YoY 18.1% -37.8% -21.4% -16.6% -27.8% -46.0% -37.8% -6.5% SG&A expenses YoY 19.0% -3.0% -20.9% 6.3% -20.9% -5.5% 38.4% 31.9% Operating profit YoY OPM Recurring profit YoY RPM Net income YoY Net margin Source: Shared Research based on company data. Note: Figures may differ from company materials due to differences in rounding methods. Note: FY estimates are latest figures. Operating revenue breakdown FY04/16 FY04/16 Source: Shared Research based on company data. Note: Figures may differ from company materials due to differences in rounding methods. FY04/17 FY04/17 Cumulative (JPYmn) Q1 FY04/16 Q2 Q3 Q4 Q1 FY04/17 Q2 Q3 Q4 Operating revenue YoY % -82.7% -40.1% -4.6% 3 Product sales YoY % 36.8% 57.0% 0 R&D operating revenue YoY % Quarterly FY04/16 FY04/17 (JPYmn) Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Operating revenue YoY % -82.7% 293.3% 88.6% 7 Product sales YoY % 221.8% 79.0% -0 R&D operating revenue YoY % FY04/17 07/82

8 Full-year FY04/17 results Operating revenue: Operating loss: Recurring loss: JPY616mn (+334.2% YoY) JPY1.2bn (versus loss of JPY1.8bn in FY04/16) JPY1.3bn (versus loss of JPY1.9bn in FY04/16) Net loss*: JPY1.4bn (versus loss of JPY2.5bn in FY04/16) *Net income/loss refers to net income/loss attributable to parent company shareholders. Operating revenue came from European and Asian sales of hemostatic agent TDM-621 (JPY94mn from Europe, JPY6mn from Asia and Oceania, and JPY7mn from Latin America). In China, the company booked a one-time contract payment of JPY509mn. As for expenses, SG&A expenses and R&D expenses were in line with the company s full-year plan. Hemostatic agent (TDM-621) Status in Japan In Japan, after 3-D Matrix withdrew its application to manufacture and sell this pipeline product in the domestic market in March 2015, it continued discussions with the Pharmaceuticals and Medical Devices Agency (PMDA) for a second clinical trial. The company drafted a clinical trial plan for comprehensive evaluation covering its hemostatic effects on hemorrhage per diapedesis in endoscopic submucosal dissections, and its overall safety. In April 2017 the company submitted a plan to launch a clinical study to the PMDA. The latest clinical trial plan entails comparing the efficacy of TDM-621 with conventional hemostasis methods in gastrointestinal endoscopy in Europe, where the absorbable localized hemostatic is already in use (marketed overseas under the name PuraStat ). The clinical trial is scheduled to begin in Q1 FY04/18, and take about one year to complete. Status in Europe After receiving European CE marking certification in January 2014, the company began manufacturing and marketing the product through sales agents (specialized by country) with the aim of reaching prominent doctors and medical institutions in major countries including Germany, France, and the UK. Product sales were JPY94mn (up around 3.3x YoY), but just 32% of initial forecasts (JPY294mn). At the end of FY04/17, the company had increased the number of sales agents to 30 and the number of target medical facilities to 200, but this fell short of the aim of having 250 target medical facilities by the end of the fiscal year. In key countries, registration of the products at medical facilities (paperwork necessary to begin purchasing products) took longer than expected. Furthermore, while doctors at leading medical institutions in Italy and Spain wanted to purchase the product, it took longer than expected to begin public tenders necessary to sell to public hospitals, so the company was unable to start selling to leading medical facilities. Further, the company had forecast sales to start expanding from Q4, but distributors in the key country of Germany did not grow sales as much as anticipated. Also, in Germany and France the company had concluded sales distribution agreements with major agents for endoscopy in 2H, but nationwide distributors in the area of cardiovascular surgery were not yet up and running. The company has ongoing partnership discussions with candidates regarding comprehensive sales cooperation, with the aim of strengthening its product sales over wide areas of Europe. (The candidates need sales networks spanning the entire region and strong promotion capabilities.) The company said it was continuing contract talks, and working to extend its sales track record in Europe, which is an issue in concluding an agreement, as well as working to acquire clinical trial data that can directly flow through to sales growth. Status in Asia The company applied for medical device registration and began preparing for sales in Asian and Oceanian countries that use the CE marking system. In Australia, the company began product sales through Maquet Australia Pty Ltd (Maquet). However, it was not until Q3 FY04/17 that Maquet finished selling a batch supplied in Q4 FY04/16, negatively affecting FY04/17 results against targets. The company had a product sales target of JPY172mn, but only ended up selling JPY6mn (3.5% of forecast). Sales forecasts for the area factored in sales based on minimum purchase volumes from partners who account for roughly 60% of regional totals. However, delays in selling product procured in the prior year meant that it was difficult to sell product procured 08/82

9 in the latest year under the minimum purchase agreements. While the sales partners are working to sell product from the previous year to new medical facility customers, even if they boosted their marketing activities in cooperation with the company, this would not necessarily lead to sales. Also, other alternatives (such as changing sales agents) would not improve sales in the short term. The company thus decided it would not demand that sales agents honor the minimum purchase agreements as it decided that maintaining good relationships was important for long-term sales growth. In April 2017, 3DM signed a license agreement with Chinese Peptide Company (CPC) to commercialize the company s absorbable topical hemostatic agent in China, receiving a one-time payment of USD4.5mn. CPC will be responsible for all activities in China from product development, through clinical trials, and sales. 3DM will provide technology and development follow-up support. Following market launch, the company stands to receive royalty revenues from CPC (a percentage of net sales) for several years. In South Korea, sales partner Daewoong Pharmaceutical is in ongoing talks with the regulatory authorities regarding its product registration application. The company had planned to book a one-time contract payment of JPY50mn upon acquiring marketing approval, but was unable to as the authorities continued with their data assessment and verification activities. The company is supporting Daewoong through the review with the aim of swift marketing approval, which it hopes to obtain FY04/18. Status in Latin America As the region uses the CE marking system, the company is working toward product registration approval and product sales as a medical device in Brazil, Colombia, and Mexico. The company has received product registration approval in Brazil, Colombia, and Mexico in FY04/16, and signed agreements with local sales agents in Brazil, Colombia, Mexico, and Chile and began sales, but sales were only JPY6mn versus a forecast of JPY30mn (20% of forecast). When the company drafted the plans it estimated minimum purchase amounts, the time required to sign up sales agents, and delivery times to medical institutions (three six months). While it made progress on signing up sales agents, product supplies were held up due to the time to complete customs formalities in Brazil, so deliveries to medical institutions were delayed. Also, in South America when agents do not meet their minimum purchase requirements, the company is able to demand payment for the remaining amount as well as subsequently dissolve the contract. When 3DM made its forecasts, it assumed that it would be able to invoice for all of the minimum purchase volumes. The company had planned to demand payments from its agents for the minimum purchase amounts in Q4 FY04/17 to meet its sales forecasts. However, as the sales agents are continuing with their efforts, the company decided to maintain its sales network through FY04/18 and beyond and did not demand payment for the minimum contract purchases, although this will not have any immediate impact on sales. Status in the US In the US, the company has been consulting with the Food and Drug Administration (FDA) regarding protocols in order to start clinical trials in the US. In FY04/18, the company aims to proceed with development after once again considering protocol settings. Mucous membrane protuberance material The company started a clinical study in December However, in February 2015, it voluntarily and temporarily discontinued the study in order to explore test methods for more evident efficacy and for product development. The company continues its research into materials that can demonstrate superiority, but does not yet have specific development plans such as the resumption of clinical studies, so sales of this product are not included in the company's medium-term business plan (covering FY04/18 FY04/21). Alveolar bone regenerator In clinical trials in the US, the company completed treatment and observations of 15 patients during the first pilot study, collecting good results and data in terms of bone formation. After the FDA approved the trial protocols for a second pilot study, the company moved onto the next clinical trial phase in Q1 FY04/17. Notwithstanding time-consuming observations to confirm the process of bone formation, 3-D Matrix will stay on development track to roll out the product. 09/82

10 Wound-healing agent In October 2014, 3-D Matrix submitted a 510(k) premarket notification to the US Food and Drug Administration (FDA), which was approved in February 2015, allowing for the start of sales. The company expects increased therapeutic effects in combination with other pharmaceuticals (antibiotics, anticancer drugs, and hyaluronic acid) and as of Q3, it is working on commercialization with higher added value for the fields of skin burn treatments, skin cancer treatments, and cosmetic surgery. Other In other areas, 3-D Matrix is collaborating with the National Cancer Center on treatment for triple negative breast cancer with nucleic acid medicine that targets the RPN2 gene. The company is providing sirna nucleic acid medicine that uses the self-assembling peptide A6K as a drug-delivery system (DDS). In FY04/16, the National Cancer Center started investigator-initiated clinical trials with the new sirna nucleic acid medicine TDM-812 (RPN2siRNA/A6K compound), jointly developed by the Center and 3-D Matrix. These investigator-initiated clinical trials are targeted at treatment-resistant breast cancer patients who have tumors that can be felt from the surface of the body, and are the first such investigator-initiated clinical trials to be administered in humans. The company has also obtained a joint patent with Japan s National Cancer Center for a treatment and diagnostic method for cancer stem cells. The company is moving forward with initiatives for collaborative R&D with entities in its field and related fields. For details on previous quarterly and annual results, please refer to the Historical financial statements section. 10/82

11 Full-year company forecasts (JPYmn) FY Act. FY Est. Operating revenue ~2,354 YoY 334.2% -50.6%~282.3% Sales R&D operating revenue 509 2,050 Operating expenses 1,856 1,724~1,981 Cost of sales Cost ratio 94.8% 44.1% R&D expenses ~753 SG&A expenses 1,285 1,094 Operating profit -1,240-1,675~630 YoY - - OPM - - Recurring profit -1,270-1,675~630 YoY - - RPM - - Net income -1,393-1,700~620 YoY - - Net margin - - Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Operating revenue breakdown FY04/17 FY04/17 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. FY04/18 FY04/18 (JPYmn) FY FY Est. Absorbable local hemostatic 615 2,354 Product sales One-time contract payments and milestone payments 508 2,050 Others - - Product sales - - One-time contract payments and milestone payments - - For FY04/18, 3-D Matrix projected operating revenue of JPY304mn-JPY2.4bn (JPY616mn in FY04/17), an operating loss of JPY1.7bn to profit of JPY630mn (versus loss of JPY1.2bn in FY04/17), a recurring loss of JPY1.7bn to profit of JPY630mn (versus loss of JPY1.3bn in FY04/17), and a net loss of JPY1.7bn to profit of JPY620mn (versus net loss of JPY1.4bn in FY04/17). The company forecasts revenue from product sales of JPY304mn (JPY107mn in FY04/17) and one-time contract payments and milestone payments of JPY2.1bn (JPY509mn in FY04/17). The breakdown of product sales forecasts is: Europe, JPY219mn (JPY94mn in FY04/17); Asia and Oceania, JPY65mn (JPY6mn); and Latin America and Canada, JPY19mn (JPY7mn). Operating revenue forecasts are based mainly on sales of absorbable topical hemostatic agent (TDM-621). The lower limit is product sales highly likely to be achieved, while the upper limit includes one-time contract payments from sales of the hemostatic agent in Europe. The company expects operating expenses of JPY1.7bn-JPY2.0bn (JPY1.9bn in FY04/17). This included cost of sales of JPY134mn (JPY102mn in FY04/17), R&D spending of JPY496mn-JPY753mn (JPY470mn in FY04/17), and SG&A expenses of JPY1.1bn (JPY1.3bn in FY04/17). The company presents R&D expense forecasts in a range as the timing of incurring costs depends on when clinical trials begin. These expenses include: clinical trials and filing for approval for the absorbable topical hemostatic agent in Japan; R&D for its next-generation hemostatic agent in Europe; and R&D for its anti-adhesion agent in Europe. Pipeline assumptions In April 2017, the company submitted its application to the PMDA regarding clinical trials for its absorbable topical hemostat in the field of surgery in Japan. In its clinical trial plan for comprehensive evaluation covering the hemostatic effects and overall safety of TDM-621 on hemorrhage per diapedesis in endoscopic submucosal dissections, 3-D Matrix planned to launch clinical studies in FY04/18. The aim is to gain manufacturing and marketing approval for Japan. 11/82

12 The company is aiming to expand business for this hemostat overseas. 3-D Matrix has reached agreements with sales partners and sales agents in Europe, Asia, Oceania, and Latin America and is progressing with manufacturing and sales. In the US, 3DM is at the protocol discussion stage prior to launching clinical studies, with the aim of launching trials at an early stage. Among other products in the development pipeline, the company is conducting clinical studies in the US for its alveolar bone regenerator. Once the clinical studies are complete, 3DM intends to apply for manufacturing and marketing approval and produce and sell the product within the US. Other than this, the company is searching for other pipeline candidates. 3-D Matrix is proceeding with joint research in conjunction with universities and research organizations to acquire applied technologies, including developments in the drug-delivery system (DDS) field. Projections for absorbable topical hemostat sales by region Europe 3-D Matrix assumes sales of JPY219mn for FY04/18 versus JPY94mn in FY04/17. The company expects its 30 sales agents across Europe to grow sales based on results from Q4 FY04/17. When making its forecasts, 3DM used average monthly sales (JPY12mn) in the latest quarter, Q4 FY04/17, as a starting point. This reflected the latest circumstances at the company s sales agents and target medical facilities. When making its calculations, the company also interviewed individual distributors in its key countries of Germany, France, and the UK (regarding size of operations, speed of signing up medical facility customers, and forecast sales per facility), also factoring in projected increases in the number of hospitals available to market to. The company had JPY16mn worth of orders in key countries as of June Regarding Spain and Italy, there are major differences in when the company can begin sales depending on whether there are public tenders are not, so 3DM has taken a conservative approach and not factored in sales to public hospitals in its forecasts. Also, regarding the 30 sales agents that were operating at end-fy03/17, 3DM made forecasts for the existing 200 target facilities. While the company expected a contribution from new sales agents likely to be signed up this fiscal year, it took a conservative approach and did not factor these into its sales forecasts. Forecasts by country in Europe are as follows: In the UK, registration is necessary at each hospital. In FY04/17, the company expected this to take six months, but in fact it took a year. However, in FY04/18, product usage volumes are starting to expand at major hospitals that had completed the procurement process by the end of FY04/17. The company plans to nurture more than 10 key accounts, using key opinion leaders. In France, there are just a few independent distributors that can cover the entire country. In FY04/17, 3DM missed forecasts as the distributor it had been building a partnership with was taken over. In FY04/18, the company expects results from a sales and marketing partnership agreement for its absorbable topical hemostat in the field of endoscopy struck with PENTAX Europe GmbH in April The company also plans to enter negotiations with a leading surgical distributor, but has not factored any resulting sales into its FY04/18 forecasts. In Germany also, there are few leading distributors and a limited number of independents with full country coverage. In FY04/17, the company was in talks with a distributor in the field of surgery regarding a product marketing agreement for its absorbable topical hemostat. However the counterparty sold the business and 3-D Matrix missed forecasts as sales personnel were retrenched. The company entered a sales and marketing partnership agreement with Nicolai Medizintechnik GmbH for its absorbable topical hemostat for endoscopy in November 2016, and expects some results in FY04/18. 3-D Matrix plans to have multiple distributors in the field of surgery, and strengthen its marketing capabilities by investing its own resources, but has not factored the impact into its forecasts. In Italy and Spain, public tenders are necessary when selling to public hospitals, which make up 80% of the total, but these have not occurred. According to the company, tenders normally take place once every two years, and they are already 12/82

13 around one year overdue. 3DM plans mainly to market to private hospitals in FY04/18 and has not included any sales to public hospitals in its forecasts. Asia and Oceania The company assumes sales of JPY65mn for FY04/18. 3DM aims to focus on growing sales in the key Australian market this year as well. However, given the lessons of the previous year, it has not included minimum purchase volumes from its sales partners in the forecasts. Also, the company decided that it could not include South Korean figures in its forecasts because there are elements that could alter the timing of when it receives marketing approval. As of June 2017, 3-D Matrix already had JPY36mn in orders from Maquet in Australia (for delivery in Q1 and Q2). For Malaysia and Indonesia, 3DM assumed average unit sales for each sales partner equivalent to half of FY04/17 results, so the forecasts have a high probability of being achieved. In the key Australian market, 3DM has already launched marketing activities in five cities. By the end of the year, there should be sales growth due to an increase in the number of customer medical facilities and doctors. Furthermore, the areas covered should expand from general surgery to cardiovascular and endoscopic surgery. However, the company decided to frame its forecasts conservatively given other uncertain factors. Latin America and Canada The company assumes sales of JPY19mn for FY04/18. The company expects sales to begin in earnest in the key Brazilian market, but given the lessons of the previous year, it has excluded minimum purchase volumes from its sales partners from the forecasts. The company has already received around JPY2.5mn worth of orders in Brazil and it has boosted the number of sales agents from one company in Q2 FY04/17 to five. As the agents will be operating from the start of the year, the company anticipates sales growth this year. The company expects to receive CE marking certification in Canada and plans to market its products, but has not incorporated this into its forecasts due to elements of uncertainty regarding the timing of certification. One-time contract payments from absorbable topical hemostatic agent Company forecasts include a one-time sales partnership payment of JPY2.0bn in Europe and JPY50mn in South Korea once marketing approval is obtained. The company is in ongoing discussions with partner candidates in Europe. Hurdles in reaching an agreement include a longer sales track record in Europe and clinical trial data that would lead directly to sales. The company is talking to three potential partners regarding how the product has been used to date and sales trends, and hopes to come to an agreement this year. Regarding marketing approval in South Korea, the authorities continue their review, but the company expects to obtain approval this year as the review process is progressing and it is responding to the authorities inquiries. Because one-time contract payments can be affected by negotiations with partners and reviews by the authorities, the company has disclosed forecasts in a range with an upper limit. 13/82

14 Medium-term outlook Medium-term management plan In June 2017, 3-D Matrix announced a revised medium-term management plan. In compiling the plan, the company considered the progress of sales in individual regions and the progress of business in Europe, Asia, Oceania, South America, Japan, and the US. Medium-term management plan FY04/17 FY04/18 FY04/19 FY04/20 (JPYmn) Act. Est. Targets Targets Operating revenue ~2,354 1,627~4,380 5,342~7,992 Sales ,627 5,342 R&D operating revenue 509 2,050 2,702 2,650 Operating expenses 1,856 1,724~1,981 2,100~2,342 2,875~3,308 Cost of sales Cost ratio 95% 44% - - R&D expenses ~ ~ ~646 SG&A expenses 1,285 1, Operating profit -1,240-1,675~ ~2,280 2,034~5,117 Recurring profit -1,270-1,675~ ~2,280 2,034~5,117 Net income -1,393-1,700~ ~2,260 2,000~4,800 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Revenue by segment FY04/17 FY04/18 FY04/19 FY04/20 (JPYmn) Act. Est. Targets Targets Total 615 2,354 4,380 7,992 Absorbable local hemostatic 615 2,354 3,829 5,342 Product sales ,627 5,342 EU ,143 4,302 Asia and Oceania Latin America and Canada One-time contract payments and milestone payments 508 2,050 2,202 0 Others ,650 Product sales One-time contract payments and milestone payments ,650 Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Note: Product revenues by region are Shared Research estimates based on company data. For data on FY04/18, refer to Full-year company forecasts. Highlights of forecasts for FY04/19 and FY04/20 follow. Assumptions for FY04/19 targets The company expects operating revenue of JPY1.6bn to JPY4.4bn in product sales and one-time contract payments from its absorbable topical hemostatic agent. 3-D Matrix expects product sales of JPY1.6bn (+435% YoY), and one-time contract payments of JPY2.7bn. Considering the potential for variations in one-time contract payments, signing contracts is crucial in meeting the higher forecasts. Product sales 3-D Matrix forecast sales of its absorbable topical hemostatic agent to reach JPY1.6bn, broken down to JPY1.1bn (+422% YoY) from Europe, JPY376mn (+478%) from Asia and Oceania, and JPY107mn (+463%) from Latin America and Canada. Europe Forecast sales: JPY1.1bn. The forecasts are premised on sales growth in individual countries via sales agents across the European region. The key factor in forecast sales growth is the assumption that marketing to the roughly 250 target medical institutions (200 at the start of FY04/18) will be in full swing from the start of the fiscal year and an increase of 50% in the number of institutions during the year to 375. Asia and Oceania Forecast sales: JPY376mn. 3-D Matrix intends to focus on sales growth in Australia, the key country in the region. Minimum purchase amounts by its sales partners have been excluded from forecasts. The company expects product sales in South Korea to begin in the middle of the fiscal year. 14/82

15 Latin America and Canada Forecast sales: JPY107mn. Sales forecasts are built around the key country, Brazil. Minimum purchase amounts by its sales partners have been excluded from forecasts. In FY04/18, the company hopes to obtain CE marking certification in Canada and begin marketing, but because there are variables in the timing of certification, this has not been incorporated in sales forecasts. One-time contract payments One-time contract payments include JPY2.2bn in the US for a sales partnership in the company s absorbable topical hemostatic agent and JPY550mn for a sales partnership for its alveolar bone regenerator, primarily in the US. Because one-time contract payments can be affected by negotiations with partners and reviews by the authorities, signing contracts is crucial in meeting the higher forecasts in the range. Assumptions for FY04/20 targets The company expects operating revenue of JPY5.3bn to JPY8.0bn in product sales and one-time contract payments from its absorbable topical hemostatic agent. 3-D Matrix expects sales revenue of JPY5.3bn (+228% YoY), and one-time contract payments of JPY2.7bn. Considering the potential for variations in one-time contract payments, signing contracts is the key requirement in meeting the upper limit of performance forecast ranges. Product sales The company forecast sales of its absorbable hemostatic agent of JPY5.3bn, comprised of Europe, JPY4.3bn (+276% YoY); Asia and Oceania, JPY833mn (+122%); and Latin America and Canada, JPY205mn (+92%). Europe Forecast sales: JPY4.3bn. The forecasts are premised on sales growth in individual countries via sales agents across the European region. The key factor in forecasts sales growth is the assumption that marketing to the roughly 375 target medical institutions (250 at the start of FY04/19) will be in full swing from the start of the fiscal year and a doubling over the year in the number of institutions to 750. Asia and Oceania Forecast sales: JPY833mn. 3-D Matrix intends to focus on sales growth in Australia, the key country in the region. Minimum purchase amounts by its sales partners have been excluded from forecasts. The company expects product sales in South Korea over the entire fiscal year. Latin America and Canada Forecast sales: JPY205mn. Sales forecasts are built around the key country, Brazil. Minimum purchase amounts by its sales partners have been excluded from forecasts. One-time contract payments One-time contract payments include JPY2.0bn in Europe and the US for an anti-adhesion agent and JPY650mn for a surgical partnership mainly in Japan. Because one-time contract payments can be affected by negotiations with partners and reviews by the authorities, signing contracts is the key requirement in meeting the upper limit of performance forecast ranges. Funding plans R&D expenses such as clinical trials, primarily in the development pipeline, account for a large proportion of funding plan considerations. The company s policy is to strengthen its financial foundation as necessary to meet funding needs. 15/82

16 As a flexible way to raise capital, 3-D Matrix renewed a committed credit line agreement totaling JPY300mn with Sumitomo Mitsui Banking Corporation and has separate lines of credit with Sumitomo Mitsui Banking Corporation and Mizuho Bank of JPY500mn each, for a total of JPY1.0bn, as well as a JPY100mn line of credit with Resona Bank. The company has borrowed JPY450mn from the total committed credit lines and borrowing limits available. In April 2017, the company announced its 17th issuance of warrants with strike price reset provisions to stabilize its funding base (2,500 warrants representing 2.5mn underlying shares, equivalent to 11.6% of shares on issue as of FY04/17, net proceeds: JPY1.9bn.). 16/82

17 Business Business description 3DM is a medical technology company that develops, manufactures, and markets a self-assembling peptide technology originally created at the Massachusetts Institute of Technology (MIT). The key features of the company s business are: MIT holds the underlying patent for the self-assembling peptides that are the basis of the 3DM s products. The Company has an exclusive global license from MIT for this technology that includes rights of development, manufacture, and marketing of applications that use these self-assembling peptides. Self-assembling peptides have two main advantages over the medical products currently on the market they are intended to compete with. Firstly, as they are produced by chemical synthesis, there is no risk of viral or other types of contamination that can occur in goods derived from living organisms. Secondly, they can be mass-produced in a homogenous fashion. These characteristics lend themselves to potentially large-scale use in surgery (such as absorbable topical hemostatic agents and mucous membrane protuberance agents) and in the regenerative medicine field (as alveolar bone reconstruction agents). 3DM s business model attempts to minimize risks specific to medical product start-ups. Specifically, the products it is developing are categorized as medical devices rather than pharmaceuticals. Consequently, the duration from application to approval is shorter and costs are lower than would be the case if the company were to develop pharmaceuticals. Self-Assembling Peptide Technology The human body is made up of proteins, the smallest unit of which is amino acids. Peptides are molecules composed of a number of connected amino acids. Invented by Dr. Shuguang Zhang at MIT in 1992, self-assembling peptides are composed of a (16 base) RADA sequence that is made up of three types of amino acids; Arginine (R), Alanine (A), and Aspartic acid (D). The peptides are suspended in an acidic solution, when this solution comes into contact with a neutral ph environment, for example blood or a salt solution, the peptide molecules self-assemble to create a gel formed of nanofibers. Once the self-assembling peptides become gelatinous, they will not revert to a liquid state even if they returned to an acidic solution. Moreover, ADME (absorption, distribution, metabolism, and excretion) tests confirmed that self-assembling peptides do not accumulate in any particular organ but instead degrade into protease and are excreted from the body after approximately 30 days. The gel that is formed is an environment similar to that for cells cultured in vivo and has a network structure similar to that of an extracellular matrix, such as collagen. The company is exploiting these characteristics to create applications in a variety of fields, including surgery, regenerative medicine, and drug delivery systems (DDS). While MIT holds the patents on the self-assembling peptide technology, 3DM has an exclusive agreement with MIT for the basic patents for the self-assembling peptide technology: PuraMatrix is its first-generation product that uses these self-assembling peptides. PuraMatrix Source: Shared Research based on company data 17/82

18 Self-assembling peptides are non-biological molecules produced by chemical synthesis and have the following characteristics: Safety: as self-assembling peptides are produced via chemical synthesis there is no risk of viral infection (as can occur in biologically-derived molecules) or contamination from foreign elements. Homogeneity: mass production with practically identical levels of quality is possible. Ease of use: as a gel created from a solution, they are transparent and easy to handle. Development potential: application potential across a wide range of fields and in development as medical devices. 18/82

19 Main business segments The company reports only one business segment, Medical Products. However, this can be further broken down into the Medical Products Development and Research Reagent Sales sub-segments. Medical products development In this sub-segment, the company develops medical devices and treatments for use in the fields of surgery, regenerative medicine, and DDS (drug delivery systems) based on its self-assembling peptide technology. The main development pipeline consists of: Surgical field: absorbable topical hemostatic agents, mucous membrane protuberance agents, and vascular embolization agents Regenerative medicine field: alveolar bone reconstruction agents and wound-healing agents 3DM s strategy has been to develop these applications in-house as medical devices and then to obtain manufacturing and marketing approvals for them. Its sales strategy involves signing exclusive sales agreements with distributors domestically and overseas. In the field of regenerative medicine, 3DM has been conducting research into bone reconstruction (outside of the alveolar bone space), cartilage and tendon regeneration, treatments for skin wounds, and cardiac muscle regeneration; and looking to commercialize this research. As for the DDS space, 3DM has been working to launch products that combine self-assembling peptides with a variety of pharmaceuticals, with the peptides functioning as a carrier for the pharmaceutical agent. While it is also likely that self-assembling peptides themselves can be developed to function as pharmaceutical agents, independently developing this would be time consuming for the company. Instead it intends to license the technology out to third parties for this purpose and generate licensing revenue from doing so. The company is also using joint research and MTA agreements with universities and other research facilities to acquire new self-assembling peptides application technologies. Medical device development process The medical products that 3DM is focused on are categorized as medical devices. The processes for developing new medical devices and pharmaceutical products are the same: First, there is basic research, followed by preclinical trials, clinical trials, and an application for manufacturing and marketing approval. However, with pharmaceuticals the clinical-trial stage requires a number of phases and generally speaking, involves a large number of patients. As a result, the pharmaceutical development process tends to be long. More specifically, for pharmaceutical development the clinical trials have three phases; in Phase I and II, researchers test the drug/treatment on a small group of healthy people to evaluate its safety and effectiveness, while in Phase III they administer it to a large group of patients who suffer from the disease or condition that it is intended to treat to confirm its safety and effectiveness. On the other hand, medical devices require a comparatively short development process of just one clinical trial phase. The R&D process for medical devices can be summarized as follows: 19/82

20 Medical Device R&D Process Source: Shared Research based on company data Basic research: the company searches for potential medical device applications for its technologies and optimizes product specifications. Preclinical trials: animal tests conducted to see if the product meets safety and efficacy standards. Clinical trials: human trials on sufferers conducted to see if the product meets safety and efficacy standards. Application for a manufacturing and marketing approval: an application is submitted to the relevant regulatory body in each country, such as the Ministry of Health, Labour and Welfare s Pharmaceuticals and Medical Devices Agency (PMDA) and the Food and Drug Administration (FDA) in the US. Manufacturing and marketing approval: the relevant regulatory body issues an approval to the company. Inclusion in HIP/National Health Insurance schemes: in order to be covered by Japan s national health insurance scheme (HIP) or the relevant health insurance in other countries the product s reimbursement price needs to be calculated by the authorities. In Japan, the reimbursement value will set and the product included in HIP about two to three months after the manufacturing and marketing approval is approved. Market launch: the product is manufactured and goes to market. 3DM s main development pipeline consists of: Absorbable topical hemostatic agent (development code: TDM-621) Mucous membrane protuberance agent (development code: TDM-641) Alveolar bone reconstruction agent (development code: TDM-711) Wound-healing agent (development code: TDM-511) Vascular embolization agent (development code: TDM-631) All of these are based on the same sequence of self-assembling peptides (RADA 16) as absorbable topical hemostatic agent TDM-621. The company in January 2014 received the CE marking in Europe for TDM-621. As of June 2017, the product is being sold in Europe, Asia, Oceania, and Latin America. Medical reagent sales 3DM sells self-assembling peptides product, PuraMatrix, through its partner Corning Incorporated as a research reagent to universities and other research facilities around the world. PuraMatrix is used in various medical applied studies and types of therapy. 3DM is marketing the product as a research reagent in the hope that the researchers using PuraMatrix will develop new commercially viable applications. 20/82

21 Main development pipeline Development pipeline progress in the field of surgery (as of June 2017) Product candidate Region Basic research, evaluation tests Preclinical study Clinical study (trials) Application for manufacturing and marketing Approval for manufacturing and markeitng Inclusion in health insurance scheme Sales launch Absorbable localized hemostatic agent (TDM-621) Europe Japan Submitted trial implementation protocol Aims to conduct trials and appliction for approval in FY04/18 US Drawing strategy for clinical trials South Korea Expects approval in FY04/18 China Preparing for clinical study Postoperative hemorrhage preventive material Europe Started additional trials Aims for approval in FY04/18 Next generation hemotatic (TDM-623) Europe Plans to start clinical study in FY04/18 Antiadhesive material Europe and US Plans preclinical study in FY04/18 Mucous membrane protuberance agent (TDM-641) Japan and Europe Nearly completed improvement of substance Preparing for a second clinical trial Vascular embolization agent (TDM-631) Japan Preclinical study on-going Source: Shared Research based on company data Development pipeline progress in the field of regenerative medicine (as of June 2017) Product candidate Region Basic research, evaluation tests Preclinical study Clinical study (trials) Application for manufacturing and marketing Approval for manufacturing and markeitng Inclusion in health insurance scheme Sales launch Alveolar bone reconstruction agent (TDM-711) US 2nd pilot study on-going (implanted) In discussion with FDA in FY04/18 Wound-healing agent (TDM-511) US Source: Shared Research based on company data Development pipeline progress in the field of DDS (as of June 2017) Product candidate Region Basic research, evaluation tests Preclinical study Clinical study (trials) Application for manufacturing and marketing Approval for manufacturing and markeitng Inclusion in health insurance scheme Sales launch sirna nucleic acid medicine (TDM-812) Japan and Asia Ivestigator-lead trials on-going Source: Shared Research based on company data Absorbable topical hemostatic agent (development code: TDM-621, trade name: PuraStat) 3DM is developing the absorbable topical hemostatic agent TDM-621 based on its RADA16 self-assembling peptide technology. TDM-621 can be applied with a syringe to comparatively narrow openings where bleeding may occur during surgery and can also be used in conjunction with an endoscope. 21/82

22 TDM-621 becomes ph-neutral when it comes into contact with bodily fluids, such as blood. The peptides then self-assemble into nanofibers and become gelatinous. The gel perfectly coats the surface of the contact area, forming a coating that physically seals the surface film and peripheral blood vessels. In aortal blood vessels, it produces blood coagulation and hemostasis. Overview of Hemostasis Source: Shared Research based on company data No risk of infection with TDM-621; advantageous in different types of surgery Existing biological hemostatic agents carry infection risk Existing hemostatic agents are categorized as liquid types (fibrin glue) or sheet/powder types (fibrin and collagen). Fibrin glue involves creating a paste out of blood-derivative fibrinogen, and there are questions over its safety. Source: Shared Research based on company data Absorbable hemostatic agent (TDM-621) has low infection risk TDM-621 has a number of advantages over existing hemostatic agents. First, there is no risk of infection. The majority of hemostatic agents currently in use are synthesized from human or animal blood, such as from fibrinogens, while the raw material for collagen is produced from the skin of animals. As these products are derived from living organisms, they carry the risk of viral infection. In contrast, TDM-621 is chemically synthesized from amino acids and so carries no risk of viral infection or contamination from unknown elements. Informed consent not required The medical use of biologically derived products is subject to strict controls: Informed consent. Patients (or their families) must receive an appropriate explanation about their use and risks Records of production and use must be kept Reports must be created verifying absence of infectious diseases in the products 22/82

23 As TDM-621 is chemically synthesized product, there is no infection risk. Apart from obvious healthcare and legal benefits, this could also reduce administrative burden. In cases when biologically derived hemostatic agents are used, patients (or their representatives) must sign off a consent form before the start of the surgery. When TDM-621 is used, no consent is required. As a result, if a surgeon determines that a hemostatic agent is required during the course of performing a procedure, TDM-621 can be used immediately. Infections transmitted during medical procedures have emerged as a serious public health issue in the recent years and there is substantial latent demand for new medical agents that can eliminate the risk of infection, reduce surgery time and alleviate the burden on patients. Transparent liquid that preserves field of view From a surgeon s perspective, absorbable topical hemostatic agent TDM-621 also has a number of appealing features. A transparent liquid, it becomes a ph-neutral gel only after coming into contact with bodily fluids such as blood. Therefore, it does not obscure a surgeon s view and can be easily applied via a catheter or into a narrow tissue entrance. In contrast, standard hemostatic agents are cloudy liquids and can obscure a surgeon s view of a damaged area, especially when operating remotely with a camera. Finally, unlike surgical glue, TDM-621 does not self-solidify, so it can be applied via a catheter. Hemostatic performance of TDM-621 is high 3DM notes that TDM-621 induces hemostasis in, and perfectly seals surface membranes and peripheral blood vessels, meaning it can induce a greater hemostatic effect than existing products (which induce hemostasis by bonding the tissue or covering it with an adhesive agent. Image of DM-621 Source: Shared Research based on company data TDM-621 is dispensed as a prefilled syringe (already containing the product) adding to ease of use. Any residual left in the body breaks down into amino acids and is naturally excreted over the course of several days. To eliminate the risk of administering potentially dangerous dosages, 3DM has introduced a number of measures to prevent accidental dangerous use. For instance, TDM-621 is prefilled in a syringe with a non-standard tip that prevents attaching needles and limits the amount of substance to recommended levels (see image above). 23/82

24 TDM-621 Features Source: Shared Research based on company data Price, market size According to the company, the global hemostat market is worth about USD3.0bn. In January 2014, the company received the CE marking in Europe for TDM-621. About half of the hemostat market comprises regions where sales are possible with the CE marking, or approval may be granted without clinical trials with the CE marking. Global hemostat market (USDmn) 3,500 3,000 2,500 2,000 1,500 Market size Approx. USD3.0bn China (USD142mn) Japan (USD170mn) CE marking applies (USD286mn) Cleared to market products with CE marking (USD1.1bn) Development stage Preparing for clinical trials Preparing for clinical trials Expanding to Latin America, Asia and Oceania, using the CE marking 1, The US (USD1.3bn) Production and sales launched Preparing for clinical trials Source: Shared Research based on idata millennium (US), Yano Research Institute (Japan; for Europe and others) Assuming the same pricing as for existing hemostatic products, Shared Research anticipates a sales price of around JPY14,000/cc. However, when considering the competitive advantages of TDM-621, it is conceivable that a premium could be charged. R&D status and sales partnerships in Japan R&D status in Japan Clinical trials for TDM-621 in Japan completed in April DM launched clinical trials in January 2010 for TDM-621 in order to apply for a Japanese manufacturing and marketing approval. 97 clinical trial patients were chosen who exhibited the following symptoms: Exudative (oozing) hemorrhaging from wounds in coronary artery bypass surgery and artificial vascular replacement surgery Exudative hemorrhaging from the wound surface in hepatic resection surgery 24/82

25 Exudative hemorrhaging from the mucosal resection part or submucosal layer during upper gastrointestinal tract endoscopic mucosal resection surgery, and endoscopic submucosal dissection. Clinical trials were completed in April TDM-621 s hemostatic efficacy has been generally confirmed in clinical trials and tests five to seven days after surgery did not detect any problems. Additional tests required for efficacy, approval application withdrawn in March 2015 with intent to resubmit Based off the clinical-trial results, the company submitted a manufacturing and marketing approval application in May 2011 to the PMDA for TDM-621. However, the PMDA has notified 3DM that it must provide stronger evidence for the efficacy of TDM-621, with more precise evidence on its hemostatic effects. In March 2015, the company withdrew its application for domestic manufacturing and marketing approval and has decided to restart clinical trials in Japan and reapply for approval. The company plans to commence clinical trials in April In the medium-term management plan announced in June 2016, the company described plans to bring TD-621 to market in Japan. It planned to perform clinical trials in FY04/17 and file for approval in FY04/18, then launch the product in FY04/19 following approval. Submits clinical trial plan for TDM-621 on hemorrhage per diapedesis in endoscopic submucosal dissections in April 2017 In April 2017, the company created a comprehensive clinical trial plan to evaluate a number of factors including the efficacy and safety of the use of TDM-621 on hemorrhage per diapedesis in endoscopic submucosal dissections, which it submitted to the PDMA. The plan entails comparing the efficacy of TDM-621 with conventional hemostasis methods in Europe, where the hemostatic agent is already in use in gastrointestinal endoscopy (marketed overseas under the name PuraStat ). The trial was scheduled to begin in Q1 FY04/18 and take around one year. In the medium-term plan announced in June 2017, the company planned to conduct clinical trials and apply for manufacturing and marketing approval for TDM-621 in the Japanese market during FY04/18. Sales partnership status in Japan: Sales partnership with Fuso In May 2011, 3DM concluded an exclusive sales agreement for absorbable topical hemostatic agent TDM-621 in Japan with Fuso Pharmaceutical Industries Ltd. (TSE1: 4538). The company has already received an upfront payment and a milestone payment (triggered by the confirmation of the regulatory approval application). It will receive a further undisclosed milestone payment upon receiving the manufacturing and marketing approval for TDM-621. Furthermore, Fuso Pharmaceutical is obliged to purchase a minimum volume of TDM-621 from 3DM for approximately 10 years. Fuso Pharmaceutical was chosen as a partner as it recognized the value and potential of the product from an early stage. R&D status and sales partnerships in Europe R&D status in Europe In Europe, 3DM s French subsidiary obtained a CE Mark in January 2014 (CE Marks are required certification for selling medical devices in the EU and denote EU safety standards have been met). According to the company, the acquisition of the CE Mark will enable 3DM to sell the product in 28 EU member states. Sales partnership status in Europe: Sales via agents begin, negotiations for sales partnership agreements underway In Europe, the company is simultaneously pursuing both direct sales through sales agents and contracts with distributors. The company is concluding contracts with sales agents in each country. These agents are brokers with their own relatively small-scale sales networks. Meanwhile, distributors are larger companies with sales networks throughout Europe and the capacity to run their own sales promotions. According to the company, there are only a limited number of hospitals in Europe which perform surgical operations that would use their absorbable topical hemostatic agent. This means that pursuing direct sales through sales agents should lead to increased sales volume. The company also plans to accelerate sales volume growth through concluding 25/82

26 sales contracts with distributors targeting all of Europe, as these distributors possess sales networks throughout the region and are capable of running promotions. As of April 2017, the company had sales agency agreements with 30 companies in Europe, and increased the number of target medical facilities to 200. In FY04/17, product sales in Europe were JPY94mn (roughly 3.3x FY04/16 levels). As of June 2017, the company was engaged in negotiations with three potential sales partners for FY04/18. Of the three counterparties, the company intends to grant an exclusive sales license to one company, and concentrate its European sales through this channel. The company expects some JPY2bn in upfront contract payments as a result of these sales partnership agreements. Market for hemostatic products in Europe Based on Millennium data, the company estimates that the European market for hemostatic products is worth USD1.1bn. Existing products include Fibrin Sealant, which has a high market share, Gelatin, and Bioglue (an adhesive used in surgery), which together with other types of liquid and spray-type products are thought to hold about 80% of the market. The company aims to expand products sales by getting users to switch from Fibrin Sealant and other liquid and spray-type products to PuraStat. Market for hemostatic products in Europe Share by department Share by product Cardiovascular surgery 36.1% Fibrin Sealant (Tisseal, Evicel) 50.0% Surgery (inc. digestive surgery) 19.4% Gelatine (Floseal, Surgiflo) 12.0% Gastrointestinal department 14.6% Tachosil 10.0% Brain surgery 11.8% Bioglue 8.0% Urology, gynecology 10.4% Surgicel 5.0% Plastic surgery 7.6% Arista AH 2.0% Others 13.0% Source: Shared Research based on MedMarket Diligence R&D status and sales partnerships in Asia and Oceania R&D status in Asia and Oceania In Asia and Oceania, regions such as Hong Kong and New Zealand allow sales of products bearing CE marking, and in Singapore, Indonesia, South Korea, Taiwan, and Australia, the CE marking grants the right to receive manufacturing and sales approval and product registration without the need for clinical trials. For the absorbable topical hemostatic agent PuraStat, clinical trials in Hong Kong began in September 2014, while approval to register as a medical product was obtained in Singapore in September 2014, in Indonesia in April 2015, in Australia in January 2016, and in January 2016 in Thailand. An approval request was filed in South Korea in January The company is also preparing to conduct a clinical trial in China with a view to launching the product during FY04/17. Sales partnership status in Asia and Oceania: Sales partnerships with five companies 3-D Matrix aggressively formed sales partnerships in Asia and Oceania in FY04/16. As of June 2016, the company had sales partnerships with five companies in the area. The following is the status of the company s product registrations and sales partnership in the Asia and Oceania region. Sales partnerships and product registrations for the absorbable topical hemostatic agent in Asia and Oceania Jurisdiction Registration Partnership Sales Hong Kong Not required Keymax Technology (May 2015) Began China Clinical trials necessary Chinese Peptide Company (April 2017) Preparing for clinical trials Indonesia Registered Teguhsindo Lestaritama (March 2015) Began Singapore Registered Transmedic Healthcare (December 2015) Began 26/82

27 Malaysia Brunei Registered Not required Australia Registered Maquet Australia (September 2015) Began South Korea Application filed (January 2015) Approval expected during FY04/18 Daewoong Pharmaceutical (September 2010) Thailand, the Philippines, Vietnam Application filed in Thailand Daewoong Pharmaceutical (July 2015) Source: Shared Research based on company data R&D status and sales partnerships in Latin America R&D status in Latin America Latin America (including Brazil, Colombia, and Mexico) is a CE marking region, allowing for manufacture and sale approval and product registration without the need for clinical trials. The company received medical device registration approval for the absorbable topical hemostatic agent PuraStat in July 2015 in Colombia, November 2015 in Brazil, and in February 2016 in Mexico. Sales partnership status in Latin America As shown in the following figure, the company has sales partnership agreements with distributors in Brazil, Colombia, Mexico, and Chile. Product registration and sales of absorbable topical hemostatic agent in Latin America Jurisdiction Registration Partnership Chile Not required M. Kaplan y Cia Ltda (April 2016) Colombia July 2015 Distrimedical S.A.S (September 2016) Brazil November 2015 Signed regionally based agency contracts Mexico February 2016 Genelife S.A. (February 2016) Other Latin American nations Conducting marketing research and studying regulatory issues May form partnerships with major local companies; considering expansion in other locations Source: Shared Research based on company data R&D status in the United States R&D status in the United States In the United States, the company submitted an investigational device exemption application to the FDA in FY04/13. In the medium-term management plan announced in June 2017, the company indicated that to bring TDM-621 to the US market, it planned to start clinical trials in FY04/17, complete the trials in FY04/19, and obtain approval and bring the product to market in FY04/20. Preventing post-operative bleeding: expanded application for TDM-621 In Europe, typical methods of preventing bleeding after endoscopic surgery on digestive organs, such as polypectomy (the removal of colorectal polyps), endoscopic mucosal resections, and endoscopic submucosal dissection, include heat coagulation and the use of hemostatic clips, according to the company. However, they still see bleeding within 24 hours of surgery among 5-20% of the patients, causing them to undergo another surgery, experience delays in the healing of the wound, or suffer from stenosis. The result is a significant deterioration of the quality of life. Medical practitioners have been calling for measures to prevent post-operative bleeding, deal with delays in the healing of wounds due to cicatrization (scar formation), treat esophagus constrictions, help maintain patients quality of life, and reduce doctors workload in the treatment of post-operative bleeding. According to the company, applying PuraStat after gastrointestinal endoscopic surgery can prevent post-operative bleeding. The company is now in the process of developing a product used to prevent post-operative bleeding as an additional application of PuraStat. In FY04/17, the company filed for the CE marking, citing statistically significant results from 130 cases. However, 3DM 27/82

28 was asked to conduct an additional comparative study, and as of June 2017, was conducting a randomized controlled trial of 90 cases. The company said it would reapply for the CE marking in 2H FY04/18. According to 3DM, endoscopic surgery accounts for 30% of all surgeries in Europe, with roughly 3mn cases. Around 150,000 operations involve bleeding where hemostatic materials are applicable (intraoperative hemostasis applications). Meanwhile, among endoscopic surgeries, post-operative bleeding or cases where there are concerns of post-operative bleeding are more numerous at around 1.3mn (preventative post-operative bleeding applications). This represents sales of over JPY10bn, and the company said there is scope for the European hemostatic materials market to grow by another 10 20%. 3DM said that if it can gain approval for PuraStat to be used to prevent post-operative bleeding, this may be the only such product on the market. Next-generation hemostatic agent As of June 2017, the company was developing an improved, more effective version of hemostatic agent PuraStat, TDM-623, and planned to launch clinical trials in Europe during FY04/18. According to 3DM, the next-generation hemostatic agent is the same as PuraStat in being colorless and transparent, and having no risk of viral infection as it is fully synthetic, but has superior gel strength, and turns into gel more quickly. In terms of costs, as it is low concentration and highly effective, results are obtained with small amounts of material. Further, as production is simple it is possible to lower manufacturing costs and the product can be stored at room temperature, which lowers logistics costs. Comparison of PuraStat and next-generation hemostatic material Item PuraStat (medical device) Next-generation hemostatic material (medical device) Appearance Colorless and transparent Colorless and transparent Infection risk None (artificially synthesized peptides) None (artificially synthesized peptides) Gel strength Moderate Strong Peptide concentration Moderate Low Manufacture Sterilization difficult Sterilization easy Logistics/storage Refrigerated transport/storage Room temperature transport/storage possible Source: Shared Research based on company data Anti-adhesion agent After an operation, if organs adhere to other organs or tissues to other tissues, they cease to function normally. If adhesions form after one operation, subsequent operations are more difficult due to the need for adhesiolysis (surgery to remove adhesions), increasing the length of the operation and heightening risk. Given these concerns, preventing adhesions is an issue in the field of surgery. The global market for anti-adhesion agents was roughly JPY80bn in 2016, and is forecast to grow at an average annual rate of around 8%. Anti-adhesion materials used in surgery are in the form of a film, and attached to areas where the surgeon wants to prevent adhesions. These are absorbed in around one month. They sometimes break when bent, or become uneven when attached to irregular surfaces. They are also difficult to attach to small or deep surfaces, creating the need for anti-adhesion agents in gel form, according to the company. As of June 2017, 3DM was developing a gel-based anti-adhesion agent using peptides as raw materials, and was conducting nonclinical efficacy studies. The gel-based adhesion agent under development can be painted or sprayed on to make a thin film, making it possible to apply in areas that were previously difficult for conventional anti-adhesion materials. 3DM planned to launch preclinical trials during FY04/18. Adhesions are normally found in around 50% of the cases of turbinate resection and nasal septoplasty in otolaryngology, necessitating another operation due to nose blockages. However, there were adhesions in only two of 50 cases where PuraStat was used as an anti-adhesion agent, confirming its efficacy in reducing adhesions. 28/82

29 Mucous membrane protuberance agent (development code: TDM-641) The company is developing TDM-641 as an agent to be injected into the submucosal layer in endoscopic procedures and causes the affected area to protrude. Based on the product s feature namely, of forming a ph neutral gel on coming into contact with a liquid, such as blood it has been confirmed in animal experiments that not only can TDM-641 produced the protuberance, but that it also possesses a secondary hemostatic effect. Naturally, saline and sodium hyaluronate do not provide this hemostatic effect and it is hoped that TDM-641 will reduce the difficulty of these operations. Overview of the mucous membrane protuberance method Source: Shared Research based on company data TDM-641 R&D Status Both mucous membrane protuberance agent TDM-641 and absorbable topical hemostatic agent TDM-621 use the same RADA 16 self-assembling peptides as their raw material, although the concentration of the peptides varies for the two. Consequently, safety data obtained in clinical trials for TDM-621 can also be used for TDM-641. In December 2014, the company launched trials of TDM-641, in order to evaluate and verify its safety and efficacy as a submucosal injection material for endoscopy, for EMRs (endoscopic mucosal resections) and ESDs (endoscopic submucosal dissections). The company planned to enroll 260 patients in these trials. In February 2015 the company decided to temporarily halt the trials because the tests failed to provide sufficient proof of the efficacy anticipated from previous clinical trials. The company will seek to come up with a better method of testing. In its medium-term management plan announced in June 2017, the company said it would consider a better method to measure the efficacy of TDM-641 and consider new ways of developing its products. TDM-641 Sales Agreements In February 2012, the company signed an exclusive sales agreement for TDM-641 in Japan with Fuso Pharmaceutical Industries. The company has received upfront payments, and expects to receive milestone payments upon applying for and obtaining manufacturing and marketing approval. Alveolar bone reconstruction material (development code: TDM-711) Alveolar bone degradation due to periodontitis can cause teeth to drop out. In such cases, artificial teeth can be artificially implanted, however, if there is not enough bone to affix the artificial teeth to then alveolar bone reconstruction surgery is required beforehand. In the US, alveolar bone reconstruction procedures for implants sometimes utilize bone substitutes such as autologous bone, allogeneic bone, and artificial bone. 29/82

30 TDM-711 is a scaffolding material for alveolar bone reconstruction. The nanofibers created by self-assembling peptides in their gelatinous form have a structure similar to the biological environment required for cells proliferation. By filling in areas where there is a lack of bone, TDM-711 s characteristics allow it to function as a scaffolding material to promote bone reconstruction. 3DM is investigating the use of alveolar bone reconstruction material TDM-711 to improve bone take-up in reconstruction procedures that use autogenous or allogeneic bone grafts. Additionally, TDM-711 carries no risk of infection and should improve patients quality of life. Overview of alveolar bone reconstruction process 3DM is developing alveolar bone reconstruction material TDM-711 in the U.S. Shared Research believes that this is because the country already has the market for the material in the regenerative medicine field and clinical trials are easy to undertake in the dental field. Over the long term, the company appears to be targeting the orthopedic surgery field (larger market) with its bone reconstruction material. TDM-711 R&D Status In February 2012, it commenced clinical studies (first pilot study) at the Forsyth Institute (an independent non-profit research center affiliated with Harvard University). In June 2012, the company completed the treatment and observation of 15 patients in line with a predetermined protocol. None of these patients showed serious adverse side-effects. In May 2014, the company submitted a full report of the clinical trials to the US Food and Drug Administration (FDA). 3DM plans to launch a second pilot study in Q1 FY04/16. Because follow-up observations to confirm bone formation take time, clinical trials were ongoing as of June In its medium-term management plan announced in June 2017, 3DM indicated that it planned to complete clinical trials for alveolar bone reconstruction material TDM-711 in FY04/18, and file for approval and obtain approval in FY04/19. Wound-healing agent (development code: TDM-511) Most of the products that the company has in its pipeline are intended for use inside the body. However, the company is also developing a product applied to the skin for use in tissue regeneration. Wound-healing agent TDM-511 is one such product. It self-assembles into a gel structure and forms nanofibers, creating a condition conducive to skin-tissue regeneration. This product is applied to light to moderate skin wounds. 30/82

31 Source: Shared Research based on company data TDM-511 is used to stop topical bleeding (it can quickly stop bleeding from the surface skin and inner skin) and heal wounds (it promotes healing by enhancing tissue regeneration functions). However, the product has other uses. For instance, this agent could be used to restore the skin after a tumor is removed. Animal experiments showed that the agent not only promoted tissue regeneration, it also restored the skin to its original condition. Hence, in addition to medical applications, this product is also being developed for use in cosmetic surgery. R&D status The target markets for the wound-healing agent are Europe and the US. In October 2014, 3DM submitted a 510(k) premarket notification to the US Food and Drug Administration (FDA), with a view to marketing the product as a medical device. The company received approval in February 2015, allowing for the start of sales. Now that the company s 510(k) has been approved, it expects increased therapeutic effects from combinations with other drugs (antibiotics, anticancer drugs, and hyaluronic acid), and is working on commercialization by providing higher added value for cosmetic surgery, primarily for burn and skin cancer treatments. In the US, premarket notification submissions for medical devices that are substantially equivalent to existing devices in safety and effectiveness can be filed without clinical trials. This submission process is known as 510(k). Vascular embolization agents (development code: TDM-631) 3DM has been pursuing R&D of its RADA 16 self-assembling peptides technology for use as an intravascular embolization agent in hepatic artery embolization surgery and uterine artery embolization surgery. The development code for this product is TDM-631. In hepatic artery and uterine artery embolization surgery, TDM-631 is injected via a catheter into the embolus in the artery, this blocks the artery that provides the liver or uterine tumor with nourishment and by cutting off the blood supply the tumor dies. As TDM-631 becomes gelatinous when it comes into contact with a liquid, it can be injected into the artery via a catheter and used to close the intravascular cavity the company is exploring TDM-631 s use as a new type of embolization agent. TDM-631 R&D Status In pre-clinical trials, 3DM confirmed that vascular embolization agent TDM-631 becomes gelatinous within an intravascular cavity after it was dissolved in a contrast agent and had been injected into the cavity via a catheter. Moreover, it confirmed that the gelatinous TDM-631 can be checked visually using an X-ray camera. Going forward, once the company s mucous membrane protuberance agent enters the clinical development stage, 3DM plans to conduct testing towards the clinical development of its vascular embolization agent. In its medium-term management plan announced in June 2016, 3DM indicated that it planned to begin preclinical trials for vascular embolization agent TDM-631 in FY04/18, complete clinical trials, file for approval, obtain approval, and bring the drug to market in FY04/19 or later. 31/82

32 Embolization Therapy Source: Shared Research based on company data DDS Field 3DM has been researching the possibility of using self-assembling peptides as a carrier in drug delivery systems (DDS). It has also conducted multiple efficacy trials into the controlled release of proteins, including bfgf and PDGF. The surfactant peptide A6K is drawing particular attention. A characteristic of A6K is that it forms a kind of nanotube, called micelle, in liquids. The micelle is able to include or encapsulate various materials in it due to its surfactant effects. 3DM is researching whether this characteristic can be used to deliver sirna encased inside micelles through the cell membrane and inside cancer cells. DDS R&D Status 3DM is conducting two joint research projects with the National Cancer Center in pursuit of new cancer therapy technologies using surfactant peptides: the National Cancer Center, Phase I Center, Early Research and Development project, and Japan s first non-clinical research aimed at turning revolutionary new cancer therapies into viable treatment options. The company is also conducting R&D with Hiroshima University into new microrna nucleic acid medicine for mesothelioma. Early R&D at the National Cancer Center, Phase I Center In the Early Research and Development project, 3DM and the National Cancer Center are collaborating to develop sirna nucleic acid medicine that uses the self-assembling peptide A6K as a drug-delivery system (DDS), targeting the RPN2 gene, responsible for the spread of cancer and its resistance to pharmaceuticals. The timeline for the project is five years, starting in FY2011. In FY04/15, the company plans to launch the first domestic investigator-initiated trials of sirna nucleic acid medicine for the indication of triple negative breast cancer that has failed to respond to existing treatments. In June 2015, it started treatment of a triple negative breast cancer patient with subclavian lymphatic metastasis (localized tumor) as part of phase I investigator-initiated clinical trials at the National Center Hospital for new sirna nucleic acid medicine TDM-812, which it developed in collaboration with the National Cancer Center. sirna (small interfering RNA) inhibits expression of specific genes by destroying cellular mrna (messenger RNA, which contains the amino acid sequence information for building proteins). sirna has long been the focus of attention for the potential of designing specific sirna molecules to inhibit the synthesis of disease-related proteins. The approach suffers from the drawback that sirna molecules are degraded immediately within the body, and indeed this obstacle has recently lead some major pharmaceutical companies to give up on sirna therapies. Success of sirna therapies therefore depends on development of a technology to reliably deliver the molecules to cells. Surfactant peptide A6K is comprised of 6 residues of the hydrophobic amino acid alanine and the hydrophilic amino acid lysine. Dissolving the molecule in water causes binding of the hydrophobic residues, creating an A6K nanotube with a positively charged external surface. Because sirna molecules have a strong negative charge, mixing A6K and sirna forms a complex of the two molecules that prevents degradation of the sirna. 32/82

33 Surfactant peptide A6K Source: Company materials Formation of complex with A6K and sirna Source: Company materials In experiments on cancer-carrying mice, administration of sirna alone resulted in increased cancer size, while administration of the A6K/siRNA complex resulted in cancer shrinkage. Also, treating dogs with naturally occurring mammary gland tumors with a sirna nucleic acid drug (TDM-812) resulted in tumor shrinkage as well. Based on these results, it started treatment of a triple negative breast cancer patient with subclavian lymphatic metastasis (localized tumor) in June 2015 as part of phase I investigator-initiated clinical trials at the National Center Hospital for new sirna nucleic acid medicine TDM-812, which it developed in collaboration with the National Cancer Center. New nucleic acid medicine: RPN2siRNA-A6K compound Source: Shared Research based on company data Japan s first progressive non-clinical research project aimed at making cancer treatment commercially viable In the non-clinical research project, 3DM and the National Cancer Center are collaborating to develop a nucleic acid medicine that uses self-assembling peptides as a DDS targeting microrna (mirna), which regulates cancer stem cells in cancerous bone tumors (osteosarcoma). The timeline for the project is three years, starting in FY2012. According to the company, it may be possible to lower the high recurrence rate of cancerous bone tumors by targeting the cancer stem cells. In the surgical and regenerative medicine fields where the company categorizes its products as medical devices, the company is able to independently carry out clinical trials and acquire manufacturing and marketing approval. But in the DDS field, product development focuses on the commercialization of its research products as pharmaceutical drugs. Here, the 3DM strategy is to license its technology to major pharmaceutical companies. MicroRNA nucleic acid medicine for mesothelioma The company is participating in an R&D project looking for a treatment for malignant pleural mesothelioma, a cancer that appears on the surface of the pleura, which covers the lungs, in cooperation with Professor Hidetoshi Tahara of Hiroshima University. The project aims to use microrna his team has specified as the active ingredient in an innovative anti-tumor nucleic acid medicine. 33/82

34 Mesothelioma is a cancer that appears on the surface of the pleura, which covers the lungs, and is commonly caused by asbestos. As of 2015, the annual death rate from mesothelioma was over 1,500, and the incidence is expected to peak in 2035 at a level 2 3x higher than today. A new drug is sought for the condition, which is currently treated with a combination of surgery and anticancer drugs, because many patients relapse after surgery and over 90% die within five years of diagnosis. The microrna specified by Tahara s Hiroshima University team has been found to act against cancer stem cells and drug-resistant cancer cells, which are believed to be the key factor that makes the difference between relapse and cure. The nucleic acid medicine under development combines the microrna with a surfactant peptide developed by 3DM, which acts as the drug delivery system (DDS). The company said it hopes this will become a groundbreaking drug that completely cures malignant pleural mesothelioma. The project was selected by the Japan Agency for Medical Research and Development s (AMED) Project of Translational and Clinical Research Core Centers grant program for fiscal 2017 as a grant recipient. According to the company, over the three years of the program, the group will conduct preclinical studies of nucleic acid medicine candidates under a joint R&D project. Once the AMED program finishes, 3DM hopes to commercialize the results in cooperation with Hiroshima University. The company will conduct R&D under this project searching for new possible applications for peptides, with the aim of developing new business streams. 34/82

35 Main business partners The company is outsourcing the manufacture of the peptide raw materials to CPC Scientific Inc. (unlisted) and two other companies, all of which appear to supply exclusively to 3DM. For absorbable topical hemostatic agent (TDM-621), in May 2011, 3DM signed a manufacturing outsourcing agreement with Fuso Pharmaceutical Industries Ltd. and part of the manufacturing process (pre-filling of syringes) has been exclusively outsourced to Fuso. In April 2009, 3DM concluded a business tie-up agreement with Itochu Chemical Frontier Corporation (subsidiary of Itochu Corp.; TSE1: 8001), for it to carry out raw peptide material procurement, outsourcing of manufacturing, and sales on for 3DM. A cooperation and support system was also implemented. For sales partnerships, see Main development pipeline. R&D System 3DM s R&D activities are carried out by two departments: Pharmaceutical Development Department (three staff): manufacturing and marketing approval applications and quality control systems; Business Development Department (six staff): sourcing of clinical-trial facilities, doctors for the trials, and the clinical monitoring required. The company has also signed self-assembling peptide technology MTA agreements with over 100 universities and research institutes worldwide. 3DM has been conducting joint research with these partners with an eye to developing new applications for its technology. In these joint-research agreements, the personnel and funds are sourced from its partners, while the company is left to acquire the rights to commercialize any results. Relationship with MIT MIT holds the substance patent and the method-of-use usage patent for the self-assembling peptides (collectively termed "the basic patents"). 3-D Matrix, Inc., a U.S. company that later became a subsidiary, concluded an exclusive patent license agreement with MIT in April 2003 for the worldwide license (including re-licensing rights) to its patents in the fields of medicine, life sciences, and beauty care. In October 2004, 3DM signed a license-and-supply agreement with 3-D Matrix, Inc. and acquired the patent rights for Asia. In October 2007, the contract was revised after 3DM became the parent of the U.S. company. The basic patents cover all the peptides that self-assemble to form a hydro-gel, and while there are some variations across regions, the main patents have all been registered. A list of both self-developed patents awaiting approval and those that the company acquired through its exclusive license deal with MIT follows: 35/82

36 Substance Patents Product Pipeline Absorbable topical hemostatic material Prominence material mucosa Embolization material Alveolar bone reconstruction material Wound-healing agent PuraMatrix Patent Description High purity peptide composition Tissue occluding agent Patent No. Territory Patent Holder Japan 3-D Matrix WO 06/ US (pending) EU (pending) Japan 3-D Matrix WO 10/ US (pending) EU (pending) 36/82

37 Application patents Product Pipeline Patent Description Patent No. Territory Patent Holder Alveolar bone reconstruction material PuraMatrix PuraMatrix Self-Assembling Peptide Cell Culture Method Self-Assembling Peptide Chondrocyte Culture Method US US MIT US US MIT EP EU PuraMatrix Self-Assembling Peptide Modified Peptide Substance Patent US US US MIT PuraMatrix Self-Assembling Peptide Nerve Regeneration Method US US (pending) MIT PuraMatrix PuraMatrix PuraMatrix PuraMatrix Self-Assembling Peptide Chondrocyte Culture Method Self-assembling Peptide 3D Cell Culture Self-Assembling Peptide Modified Peptide Cell Culture Method Self-Assembling Peptide Cardiac Tissue Regeneration Japan MIT Japan MIT CA Canada Japan MIT EP EU 3-D Matrix Japan US US PuraMatrix Wound-healing and skin reconstruction material PuraMatrix Self-Assembling Peptide Cell Culture Method and Cell Culture Self-Assembling Peptide Wound Repair and Skin Reconstruction Material Japan Okayama University US US 3-D Matrix US US Japan) 3-D Matrix EP EU PuraMatrix Self-Assembling Peptide Transfection Agent EP EU Nippon Medical Japan School 3-D Matrix US US PuraMatrix PuraMatrix DDS Self-Assembling Peptide Surfactant Peptide Nanocultures Method and Composition for Treating, Preventing, and Diagnosing Cancer Stem Cells or Derived Thereof US US MIT Japan National Cancer EP EU Center Japan 3-D Matrix PuraMatrix Method to diagnose osteosarcoma DDS using micrornas Source: Shared Research based on company data US US National Cancer Center Japan 3-D Matrix 37/82

38 Technology license agreement Technology License Agreement Contract company Counterparty Contract Title Subsidiary (3-D Matrix Inc.) MIT Amended and restated exclusive patent license agreement Contract period Main Agreement Source: Shared Research based on company data 3DM believes that because it continues to add to its multiple patents portfolio, it will maintain its competitive advantage despite the early expiration of a patent. It is working on its patent strategy with a prominent law firm based in Boston (Choate Hall & Stewart LLP). First amendment, second amendment and third amendment to amended and restated exclusive patent license agreement Basic patents covered until patent expiry, others covered until expiry or patent application abandoned Licensing MIT grants 3-D Matrix Inc. exclusive global licensing rights (incl. sub-licensing rights) of self-assembling peptide patents owned by MIT as well as those for patents A number of Bain & Co. alumni, including the current chairman of 3DM, Keiji Nagano, co-invested as angel investors when 3DM, Inc. was formed and exclusive commercialization rights to self-assembling peptides technology were acquired from a group of MIT researchers in May /82

39 Group companies 3-D Matrix Inc.: a 100% owned subsidiary based in Massachusetts, US; 3-D Matrix Europe SAS.: a 100% owned subsidiary based in Lyon, France; 3-D Matrix EMEA: 100% owned subsidiary based in Holland; will lead sales effort for hemostatic products and other medical products in Europe. 3-D Matrix Asia Pte. Ltd. a 100% owned subsidiary based in Singapore; 3-D Matrix Da America Latina Representacão Comercial Ltda.: a 100% owned subsidiary based in Brazil. Responsible for the medical products business in Latin America, including hemostatic materials and other products; 3-D Matrix Consulting (Beijing) Limited: a 100% owned subsidiary based in Beijing, China. Responsible for the medical products business in China, including hemostatic materials and other products. Global expansion Source: Shared Research based on company data 39/82

40 Business model 3DM s business model is significantly different from that of conventional drug discovery start-ups. One of the things that made this possible is a unique nature of self-assembling peptides. The company built its business model based on the characteristics of self-assembling peptides. Medical Device Business Flow-Chart Source: Shared Research based on company data Earnings and expenses Earnings and expenses FY04/12 FY04/13 FY04/14 FY04/15 FY04/16 FY04/17 (JPYmn) Cons. Cons. Cons. Cons. Cons. Cons. Operating revenue 1, YoY 599.5% -97.1% 234.7% -6.9% 42.2% 334.2% Sales R&D operating revenue 1, Operating expenses 753 1,031 1,626 2,003 1,963 1,856 Cost of sales Cost ratio 44.7% 7.7% 49.9% 45.4% 124.5% 94.8% R&D expenses Personnel expenses Compensations Others SG&A expenses ,024 1,185 1,182 1,285 Personnel expenses Compensations Transportation expenses Others Operating profit ,518-1,903-1,821-1,240 YoY OPM 32.0% Source: Shared Research based on company data Note: Figures may differ from company materials due to differences in rounding methods. Operating revenue Operating revenues can be categorized into: R&D operating revenue Sales (revenue from product sales) 40/82

41 R&D operating revenue consists of upfront contract payments and milestone payments. Upfront payments are received from sales partners and licensee pharmaceutical companies when the agreement is signed, while milestone payments are generated in the product development process when certain goals are achieved. This is similar to conventional drug-discovery venture companies. The difference is that in the case of 3DM, the company develops the substance as a medical device and independently seeks a manufacturing and marketing approval. Therefore, if its products reach the market, 3DM will sell them directly to sales partners and pharmaceutical companies by adding a certain percentage to the original manufacturing costs. What this means is that 3DM gets a substantially larger portion of the sales revenues compared to conventional drug discovery startups. Up until FY04/15, the majority of 3DM s revenues came from upfront and milestone payments. Product sales revenue from absorbable topical hemostatic agent TDM-621 will also be recorded in FY04/16 after it goes on sale in Europe, Asia and Oceania, and Latin America. The company anticipates that the weight of such revenues from product sales will grow in the future, leading to greater and more stable profits. Operating expenses Operating expenses consist of cost of sales, R&D expenses, and SG&A expenses. Cost of sales Upfront and milestone payments are earnings that do not carry any costs. Thus, R&D operating revenue has a GPM of 100%. For sales (revenues from product sales), the company expects a GPM of around 60% for absorbable topical hemostatic agent TDM-621 at the start of mass production and around 70% once the effect of mass production kicks in. Because 3DM has acquired the exclusive rights to the patents from MIT, it pays a license fee to MIT as a fixed percentage of sales. However, Shared Research anticipates that this license fee will not exceed few percentage points. 3DM pays a fee for the outsourced peptide raw materials. In addition, the company pays certain fees to such parties as CROs and pharmaceutical consultants that provide it with advice and support regarding the procurement of peptide materials, manufacturing technology, and domestic and overseas sales partnerships. The company, which has small operations with a small number of employees, uses help from outside parties to improve its product development efficiency. R&D expenses R&D expenses reached a record for FY04/15. Even then, the amount remained low: JPY816mn. A major component of the R&D expenses is compensations, including payments to CRO. The company s business model is different from that of conventional pharmaceutical startups in various other ways, as well. For instance, many conventional startups handle research and development themselves at least until the process reaches the first part of Phase II clinical trials. Since these companies do not usually license the product to drug makers until then, they often face the following risks: 1) It takes a long time before the product is licensed to drug makers; 2) Costs are high; and 3) The chances of the product failing during the process of development are high. On the other hand, the company s products are considered medical devices as opposed to drugs. Generally, this means a substantially shorter path to regulatory approval. 3DM claims it can keep development costs down by actively using outside parties. Also, all 3DM pipeline products use basically the same raw material (the RADA 16 self-assembling peptides). Therefore, once it successfully completes clinical trials for the first product, it should be able to shorten the time to market the subsequent products. 41/82

42 Overview of the company s business model Source: Shared Research based on company data SG&A expenses SG&A expenses mostly consist of personnel expenses and compensations. Personnel expenses are rising as the number of employees increases. The amount temporarily surged during FY04/14 and FY04/15 because of costs related to the issuance of stock options. 42/82

43 Strengths and weaknesses Strengths Promise of the core self-assembling peptide technology: self-assembling peptides have a number of advantages compared to their biocompatible material rivals, including safety and ease of use. Moreover, the material can be used across a wide field of applications. 3DM has been granted the exclusive worldwide license (including re-licensing rights) from MIT for the basic patents. Consequently, barriers to entry for competitors appear to be high, both in terms of technology and intellectual property rights. Differentiated business model: the company is focused on the development of medical devices, which means the product development period needed is relatively short when compared to the time it takes to develop standard drugs. Moreover, development costs are also lower for medical devices than drugs. Finally, 3DM relies on third parties for development of its medical products helping minimize its own employee numbers. Large potential market: 3DM s target markets of hemostatic agents and alveolar bone reconstruction agents are both expected to grow in the future. Shared Research believes the superiority of its core technology and its exposure to growth medical markets puts the company in a sweet spot. Weaknesses Commercial success depends on outside partners: given the company has chosen to focus on searching for pipeline products, accumulating medical device development expertise, and specializing in project management and business strategy, choosing the right partners for its other functions is critical to the company s success. Dependence on third party core patents with relatively short lives: one potential weakness for the company is the fact that most of the patents that form the core of 3DM s technology are licensed (albeit exclusively) from MIT and are due to expire in the period between 2014 and DM is aware of potential challenges and counters that clever intellectual property management strategy would sufficiently ensure legal control of the related technologies. In fact, the company has retained a prominent law firm to advise it on the patent strategy. Potential human resources bottlenecks: the majority of 3-D Matrix s functions are dependent on third parties, which helps ameliorate human resource bottlenecks as the company grows. However, the company must still secure personnel with the necessary levels of expertise in order to carry out the project functions it has chosen to focus on. Consequently, it still faces some human resource hurdles in its efforts to grow its business. 43/82

44 Market and value chain Market environment Hemostatic agent market Domestic market Hemostatic agents are used in surgery in areas such as cardiac and vascular, respiratory, digestive, and neurosurgery. The Japanese market is estimated to be worth approximately 17 billion yen. The Yano Economic Research Institute has forecast the market will remain more or less at this scale going forwards. However, most of the currently used products are fibrin glue-type or collagen-type, both of which use materials derived from living organisms and so carry the risk of infection from viruses that may reside within these materials. A string of companies has been forced to withdraw from the market as they have been unable to meet heightened safety standards following revisions to the Pharmaceuticals Affairs Law. This and other factors have led to market stagnation. After absorbable topical hemostatic agent TDM-621 is launched, the Company is aiming to capture 50% market share based off TDM-621 replacing existing products on the market. The company is also expecting the domestic market to grow to around 30 billion yen. The biggest reason is that currently surgeons are refraining from using hemostats due to concerns about the risks associated with animal/human origin of the existing products. TDM-621 resolves this problem and should trigger more liberal use. The company also develops new end applications such as use in combination with an endoscope or peritoneoscope. Domestic hemostatic agent market Source: Shared Research based on company data US and European market Hemostatic agents are widely used during surgery in the US. Due to the increasing number of operations driven by an aging society, the American hemostatic agent market is expected to grow at an annual average rate of 6% and be worth 1.3 billion dollars by 2016, according to idata Research. The European market is also forecast to reach a similar size, totaling 1.1 billion dollars in 2016 (source: the company s estimate based on data from the Millennium Research Group.). 3DM believes it can capture a 30-50% share of both the European and US markets. 44/82

45 Forecast Trends for US Hemostatic Market (USDmn) 1,200 1, EU Hemostatic Market ( ) CY2016 Est: USD1.1bn 0 CY10 CY11 CY12 CY13 CY14 CY15 CY16 Source: Shared Research based on company data Overview of the mucous membrane protuberance agent market Around 800,000 endoscopic lesion resections are performed annually in Japan and this number is increasing by about 10% per annum, according to a survey by the Ministry of Health, Labour and Welfare. Overview of the vascular embolization agent market There were 113,685 head, thorax, and abdominal surgical procedures and 11,526 procedures using anticancer agents in arterial embolization to treat uterine myoma performed in Japan, according to a Ministry of Health, Labour and Welfare survey. Overview of the alveolar bone regeneration agent market About 600,000 implant procedures are carried out in Japan each year. However, in the US about 10 times this number is performed. Moreover, alveolar bone reconstruction surgery in the US is expected to grow annually by 5.6% out to 2014, according to the Millennium Research Group. 45/82

46 Source: Shared Research based on company data Barriers to entry 3DM s core self-assembling peptide technology produces agents that have a number of advantages compared to other biocompatible materials, including safety and ease of use. The company has also obtained from MIT the exclusive global rights (including re-licensing rights) for the basic patents for this technology. Consequently, from both a technological and intellectual-property-rights perspective barriers to entry are extremely high. Competition According to MedMarket Diligence, in 2009 the global market for hemostats was dominated by major corporations such as CSL Behring (unlisted), Johnson & Johnson (NYSE: JNJ), King Pharmaceuticals, Inc. (unlisted; Pfizer Inc. subsidiary), Nycomed (unlisted; Takeda Pharmaceuticals subsidiary), and Baxter International Inc. (NYSE: BAX). Pfizer Inc. (NYSE: PFE), HemCon Medical Technologies, Inc. (unlisted) and Integra Lifesciences Corp (NASDAQ: IART) were also prominent. The main hemostatic agents in the Japanese market include: Bolheal, a fibrinogen preparation. The product is manufactured by the Chemo-Sero-Therapeutic Research Institute (Kaketsuken) and distributed by Astellas Pharma Inc. (TSE1: 4503) and Teijin Pharma Ltd., a subsidiary of Teijin Ltd. (TSE1: 3401) Tachocomb, manufactured by CSL Behring Abiten, a collagen-type absorbable topical hemostatic agent, manufactured by Zeria Pharmaceutical Co. (TSE1: 4559). Arista AH, an absorbable topical hemostatic agent, developed by Medafor, Inc. and distributed by Mera Pharmaceuticals Inc. It appears that 3DM s products are superior, particularly in terms of safety. Of many products available in the market, Medafor s Arista AH is derived from starch rather than from living organisms, and Matsudaito is a non-absorbable topical hemostatic material for the central circulatory system, derived from urethane (sales by Terumo Corporation [TSE1: 4543] and manufacturing by Sanyo Chemical Industries Limited [TSE1: 4471]). 46/82